Disrupting the Norm: Venture Capital and Healthcare

Venture capital firms have been known for their potential to disrupt existing industries and their presence in the healthcare space has drawn attention over the years for their ability to potentially make waves or even overturn the current modes of delivery and provide innovations from outside of the current set framework.

Sage Growth Partners in Nov. 11, 2019 said the U.S. healthcare market saw a 14.4% increase in mergers and acquisitions from 2017 to 2018 on back of rising domestic venture capital investment, with about $130.9 billion invested in U.S. based healthcare startups in 2018 alone.

The recent Healthcare Investments and Exits report from Silicon Valley Bank noted investor optimism for fundraising and IPO market in 2020. The bank said that U.S. healthcare venture fundraising reached $10.7 billion in 2019, setting a record for the third consecutive year.

According to the report, investment into venture-backed biopharma, medical device and diagnostics and tools (Dx/Tools) and healthtech reached $32 billion in 2019, only slightly lower than the 2018 figure.

“In 2019, public markets created significant mark-ups with up-round IPOs and positive post-IPO performance for biopharma, dx/tools, device and healthtech companies,” said Jonathan Norris, Managing Director of SVB's Life Science and Healthcare Practice and one of the authors of the report. “Strong M&A and IPO performance also led to greater returns for limited partners, further driving fundraising and investment.”

Among the notable results from 2019 highlighted by the report was the slight dip in biopharma investments. Series A investments dropped by 31% as venture capital firms shifted their focus to existing portfolio companies, the report said.

Meanwhile, series A medical device deal activity set a record in 2019, on back of increases in imaging, orthopaedic and surgical deals, which led to the uptick in investment activity. The value of device exits reached a record high, bolstered by private M&A, IPO values and public market performance, the report said.

In addition, investments into healthtech increased during the past three years, marking it as one of the fastest growing healthcare sector.

Norris noted that companies can be expected to build on the momentum of last year’s IPO surge in the first half of 2020 but added that fundraising in the U.S. will likely to slow down in the second half to reach about $9 billion, down about 15.9% as compared with the $10.7 billion reported in 2019.

Biopharma investments are expected to drop 10% to 15% as large private crossover-lead deals decline, while healthtech investments should continue to climb in 2020, led by investments in provider operations and alternative care companies, the report said.

An example of the bullish movement in the healthcare sector is the expectation of the rise in women’s digital health. Market analysis firm R2G said it expects women’s digital health to show a compound annual growth rate of 22% over the next five years to hit $297 million in 2024.

R2G said that the worldwide addressable market for digital women’s health solutions counts among the largest in digital healthcare, adding that at the end of 2019, the number of women with a mobile device capable of utilizing a digital women’s health solution numbered at a one billion.

Digital health solution and service vendors have begun take advantage of the market opportunity presented by the app economy, with the sales of digital content and premium features currently counting as the main revenue sources, according to the report by Oleksiy Danilin. However, he projects that in the next five years, digital women’s health solution providers will focus on new revenue streams, such as sales of connected medical devices, digital coaching services, and bundled digital packages to drive further market growth.

It can be seen that despite variations in the numbers and projections in the near and long term, venture fundraising in the healthcare space isn’t going to run dry any time soon. In an industry with a system referred to as bloated or inefficient, the number of outliers willing to take a chance on innovations that have the potential to improve upon patient outcomes, accessibility and profitability will not waver anytime soon. Perhaps, in the future, it may even fundamentally reshape the way we think of healthcare.